How Does Mortgage Forbearance Work?

Mortgage forbearance can help keep a homeowner in their home, but it's not a permanent free pass on mortgage payments. Learn why it's good for both borrowers and banks -- and how to get one if you need it -- in this episode of BrainStuff.

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Episode Transcript

Speaker 1 (00:01):
Welcome to brain Stuff, a production of iHeart Radio. Hey
brain Stuff Lauren Bogelbaum here. Mortgage forbearance is a temporary
pause or reduction in monthly mortgage payments for a homeowner
who's experiencing financial hardship. It's not loan forgiveness. The deferred
payments do need to be repaid at some point, but

(00:23):
mortgage forbearance can be a lifeline for homeowners who unexpectedly
lose their job or experience losses from a natural disaster,
including the COVID nineteen pandemic. But we spoke with Chuck Kracht,
director of loan servicing for the Idaho Housing and Finance Association,
which offers free loan counseling to struggling borrowers. He explained

(00:44):
that the key to avoiding foreclosure during a financial crisis
is to ask for help immediately. He said, that's the
best advice I can give to anyone. The second anyone
has any sort of trouble, they need to call their
mortgage servicer or lender or a loan counselor Time is
of the essence because if you're able to stay current
on your mortgage payments, not only will your lender be

(01:06):
more open to forbearance, but your credit also won't take
a hit during forbearance. Paused payments are not reported to
the credit agencies as delinquent as long as you were
on time with your previous monthly payments. Kracht said it's
designed to provide payment relief during a short term financial difficulty.
In non pandemic times, forbearance plans are typically offered as

(01:29):
a way to keep borrowers in their homes during a
period of unemployment or recovery from a natural disaster like
a hurricane or wildfire. The terms of a forbearance agreement
depend on the borrowers specific financial situation, so lenders typically
ask for financial records like monthly income and expenses. Sometimes
the mortgage payment is produced, in other times it's suspended entirely.

(01:52):
The kruct says that the typical length of forbearance runs
from three months to a year. Mortgage forbearance is a
tem prairie solution to financial hardship, not a long term
fix once a borrower is back on their financial feet.
Krocht says that there are three standard options for repaying
a four born mortgage. First, it can be tacked on

(02:13):
to the end many lenders will allow homeowners to move
all deferred payments to the end of the mortgage, but
think of it as a no interest second loan that's
repaid either when the house is sold or when the
original mortgage is fully repaid. As a second option, it
can be added to your monthly payment. This lets you
slowly repay the deferred amount as a small increase in

(02:34):
your remaining monthly mortgage payments. For the third option, it
can be paid off in one lump sum. While this
option is less common, some borrowers pay off the full
amount of deferred mortgage payments immediately after the forebearance period ends.
Forbearance is a smart option for both borrowers and lenders.
For borrowers, the biggest plus is perhaps obviously that it

(02:56):
offers a temporary break from monthly mortgage payments with out
adversely affecting their credit. Forbearance gives them much needed time
to find a new job or recover from a disaster
without technically missing a payment, and according to Kracht that
forbearance is a good deal for banks and mortgage lenders too,
even if it means a reduction or pause and payments,

(03:17):
because anything is better than foreclosure. He said, the foreclosure
process really doesn't benefit anybody. It's very costly to go
through foreclosure. The alternative is pretension keeping somebody in their home,
which is the best option. The main drawback to forbearance
would be that if you have trouble paying the mortgage
in general, then at some point those payments are going

(03:41):
to come do. Before the COVID nineteen pandemic, a few
states had created forbearance programs provide temporary mortgage relief, for example,
after a storm like Hurricane Harvey in but the incredible
job losses caused by the pandemic twenty two point two
million new unemployment claim in March and April alone required

(04:02):
a whole new level of emergency mortgage assistance. Under the
CARES Act, homeowners affected by the pandemic are automatically granted
mortgage forbearance for a hundred and eighty days, with an
option for extending for an additional eighty days if needed.
The correct says that the biggest difference between the forbearance
options authorized by the CARES Act and regular forbearance plans

(04:24):
is how simple and streamlined the process is for obtaining them.
Usually a lender or mortgage servicer will require financial statements
and records before extending an offer of forbearance, but not
under the CARES Act. Kracht said, all that's required is
for the borrower to call the mortgage company and say
that they've been affected. At that point, the mortgage servicer

(04:45):
or lender will put them on a forbearance plan, no
questions asked and no financial information required. The repayment options
under the CARES Act are the same as regular forbearance agreements.
According to one report from October and estimated three point
six million households or six point eight percent of all
active mortgages in the United States. We're in COVID nineteen

(05:08):
related forbearance. But what a forbearance isn't enough. Forbearance is
meant to be a short term pause in mortgage payments
while a borrower gets back on their feet. So what
happens if the forbearance period is set to expire and
the financial situation has not improved. Foreclosure is always a possibility, But,

(05:28):
as Kract says, lenders have their own reasons for wanting
to keep borrowers in their homes and will only turn
to foreclosure as a last resort, and in response to
the pandemic, the Federal Housing Finance Agency has extended its
foreclosure moratorium for all homes with federally backed loans, that is,
Fannie Mae and Freddie Mack until at least December thirty one.

(05:50):
Kroct explains that the best advice is to call your
lender or a loan counselor as soon as you realize
that you may have difficulty making payments. When the forbearance
period ends, you can find a free or low cost
loan counselor in your area by going to Consumer Finance
dot gov. At that point, the best option for you
and your lender is to make adjustments to your mortgage

(06:12):
that make payments more affordable, either by refinancing the mortgage
at a lower interest rate or creating some kind of
customized payment plan that better fits your budget. Today's episode
was written by Dave Ruse and produced by Tyler Klang.
For more on this and lots of other curious topics,
visit houstuf forks dot com. Brain Stuff is production of

(06:34):
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